When the Covid-19 pandemic began to take its toll on businesses and markets worldwide, Faraday Venture Partners stepped in early to identify the startups in its portfolio that would be worst hit. The Madrid-based VC firm has since been working closely with the companies to create and implement contingency plans as startup funding dries up amid a global recession.
Spain has been particularly hard hit. The country recorded 172,541 confirmed cases of infection and 18,056 deaths as of April 14, and a nationwide lockdown has been in place since March 14. The IMF now expects Spanish GDP to shrink 8% in 2020 and unemployment to soar to 20.8%, in an economy heavily reliant on tourism, hospitality and leisure.
In an interview with CompassList, Gonzalo Tradacete Gallart, Managing Partner and Chief Investment Officer of Faraday Venture Partners, discusses the outlook for startup investments, the measures his firm has taken so far to help its investees ride out the crisis, and more.
Founded in 2011, the VC firm invests and manages funds from its network of 220 partners, with offices in Spain, Germany and Portugal. Currently, Faraday Venture Partners has a portfolio of 27 startups while investing a total of €10m across a range of sectors. Among its investees are e-signature platform Signaturit, travel content B2B provider Smartvel and telemedicine platform ClinicPoint.
This interview has been edited for length and clarity.
How has Covid-19 affected Spain's startup funding landscape? Have we begun seeing deals postponed or cancelled? Any fall in funding numbers?
Indeed we have. Uncertainty turns money shy and investors would prefer to wait.
In the current situation, are VCs struggling too to raise money for their funds?
Yes, VCs are also struggling but that might be a short-term thing. Depending on their LP base, large VCs might be impacted, which results in less liquidity for their targeted startups.
Which sectors and technologies do you see offering good investment opportunities in this crisis? Which are the least attractive?
Attractive now are businesses that enhance digital and remote experiences and those facilitating their usage, as well as tools that allow companies to be more productive in such new and increasingly digitalized environments.
As for the latter, sectors like travel and retail are currently deeply affected, although we don't have a clear idea yet on to what extent this is so, and how long this crisis is going to last.
In such extremely uncertain times, I believe instruments like private debt will be more useful
Which funding stage(s) do you think will likely be most affected?
Seed and the very early stages of investment won’t be particularly affected. Growth stages like Series A and B will be those that suffer the most. Most startups were not prepared for this crisis and the change of dynamics, and they will probably find it hard to access later stages of funding.
Would you suggest that founders look for alternative forms of fundings, e.g., ICOs?
In such extremely uncertain times, I believe instruments like private debt schemes will probably be more useful than cryptocurrency tokens as they enable bigger-size financing for most startups. However, that should be considered only as a temporary measure to overcome the current crisis: if a startup wants to grow in value and attract fundings, it might need to pivot its model or value proposition in the aftermath of Covid-19.
What are you currently doing to support the startups in your portfolio?
In the very first days of the crisis, we contacted every startup in our portfolio to assess the impact. With the nine startups in our portfolio that were the most impacted, we are running weekly videoconferences to help them implement contingency plans.
We structure these plans based on three concepts: firstly, to cut costs through applying to government programs that temporary reduce the size of the workforce; secondly, to maximize liquidity through clients and providers as well as public financial instruments specifically launched in response to the crisis; and finally, to identify new opportunities for channels and business lines that are growing amid the recession.
We are also scheduling weekly calls with CEOs to share ideas and best practices. We also created a web page to include these resources, as well as updated useful information on grants, financing programs, new regulations, business strategy webinars, virtual investment forums, etc.
Finally, we are structuring a diversified debt fund to help our portfolio companies that cannot access funding to recover from the bump.
Which new startup(s) Faraday is currently investing in, if any?
We are currently closing an investment with a company providing data security, data synchronization and data recovery software to SMEs.
Our managing directors in Spain, Portugal and Germany are actively looking for startups. We are looking for companies that have at least three to four months of revenue and are in their early-stage funding rounds. For startups that meet this criteria, please send us an email at firstname.lastname@example.org!
The Spanish government is currently tightening controls on foreign investments. What is your view on that?
This is not favoring innovation and growth in an ecosystem, and it can be deeply affected by such restrictions.
What would you suggest that startup founders focus on in the current climate?
First, implement your contingency plans and make sure that you maximize your probabilities of success during these times of extreme uncertainties. Also, be always on the alert for new business opportunities that you can take advantage of, regardless of your experience and resources available.